ACI Worldwide, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

ACI Worldwide is a global provider of real-time digital payment software, solutions and services focused on facilitating digital payments for banks, intermediaries, merchants, and other payment providers and enablers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ACI’s business operates within the rapidly evolving digital payments industry, where competitive dynamics are fierce, and technological advancements are constant. Let’s look into whether ACIW has a moat, what the relevant risks are and if it is a company that can be easily understood.

Business Overview:

ACI Worldwide, Inc. (ACIW) provides a broad portfolio of software products and services primarily to enable electronic payments across various platforms and channels. It can be segmented into three key business lines:

  • Banks: ACI provides solutions for financial institutions, such as banks and credit unions, enabling them to offer digital payments, process real-time payment transactions, and engage customers through various digital channels. This includes fraud management and data security solutions for these entities as well. They have contracts of varying lengths with these institutions, some being multi-year.

  • Merchants: ACI also offers payment solutions for merchants, allowing them to accept payments from customers both online and in physical stores with focus on payment orchestration. These often have high transaction volumes and are often under pressure to manage compliance.

  • Billers: ACI has a segment dedicated to helping companies (billers) receive payments from their end-users via digital channels including mobile and online. This can include payment collection across many payment options (debit/credit card, bank transfers, etc.)

ACI operates in a competitive marketplace, with other large players offering digital payments solutions. Their competitive advantages come from several factors - brand reputation, large-scale clients, experience and regulatory compliance. The competitive landscape in digital payments is very dynamic, however, and subject to rapid innovation.

The company’s revenue is diverse, generated from a wide range of products and services. They operate globally, and can be broken down by geography as follows:

  • Americas: Primarily the United States, with a growing footprint in Latin America.
  • EMEA: Covers Europe, the Middle East, and Africa, and includes multiple countries with different regulatory frameworks.
  • APAC: Includes countries in Asia and the Pacific, with a key focus on emerging markets.

While ACI has a global presence, the majority of its revenues come from its American operations.

Financial Analysis:

ACI’s financial performance has been mixed recently with a combination of revenue growth and fluctuations in margins. Analyzing their financial statements indicates some key trends that impact the business.

  • Revenue: ACI has achieved moderate revenue growth in the last year, driven by the global adoption of electronic payment solutions. However, changes to foreign currency have a significant impact. Revenue in 2023, particularly in Europe and Latin America, is expected to be negatively affected due to the strong dollar. Additionally, revenue has been quite volatile over the past couple of years, and doesn’t project the stable high growth that one may expect for a tech company.

  • Margins: ACI’s operating margins have been fluctuating but have trended upwards. The increasing margin trend is a positive aspect. However, these are affected by one-time charges related to acquisitions, restructuring and other unusual items. This makes it harder to understand their normalized operating leverage.

  • Return on Invested Capital (ROIC): While ACI has consistently generated positive returns on invested capital, the percentage is not that high, indicating that the company has a moat, but not a high one. For sustainable high ROIC, the core must be extremely difficult for competitors to replicate.

  • Free Cash Flow (FCF): ACI has generated positive free cash flow, which fluctuates in line with their revenues. Their ability to generate cash from their core operations is not in question. Management says that cash generation has been strong in 2023.

Moat Analysis:

ACI has some strengths, but not strong enough to warrant a large moat, therefore, they get a moat rating of 2 out of 5. Here’s why:

  • Intangible Assets (Brands and Patents): ACI has built a reputable brand, especially in financial institutions and large corporations. They also have patents in certain technologies and processes, which makes it hard for a competitor to easily replicate their offering. While these aspects offer some differentiation, there isn’t enough pricing power to suggest any great moat. Competitors could relatively easily implement similar products as well and that gives them less moat power.

  • Switching Costs: ACI’s products tend to have a reasonable degree of customer lock-in due to integration with customers’ core systems and business operations, so, this aspect, can create some stickiness with its clients. ACI has high contract retention rates (95% on annual recurring revenues), which supports that there are indeed switching costs. These switching costs, however, aren’t that high.

  • Network Effects: ACI does have some network effects. The more customers they serve, the more reliable their network gets and they can reduce per transaction costs, so it’s a good starting point, but not comparable to payment networks, like Visa or MasterCard, which are inherently driven by network effect dynamics. So, this source of a moat is quite small for ACI.

  • Cost Advantages: The company does not have significant cost advantages, and can’t really generate savings through scale or location, as their products are very specialized and have many development costs.

Risks to the Moat and Business Resilience:

While ACI has some sources of moat, several risks to its moat and the business exist:

  • Technological Obsolescence: The pace of technological change in the digital payments industry is very high, and if ACI fails to adapt quickly, new competitors could displace their solutions with better technology. This risk is especially important in the tech world as it can significantly shrink or even erode a moat.
  • Competition: The digital payments space is highly competitive, with many established players and new entrants vying for market share. New entrants could easily provide similar or better solutions, and given the lack of pricing power at ACI, the company can be under pressure. Also, larger payment processors have the size and scale to provide better offerings at cheaper rates to customers, increasing competition and price pressure.
  • Customer Concentration Risk: A large portion of ACI’s revenue is dependent on a relatively few big clients, and if they leave or scale back their purchases, then this could severely hurt ACI’s top and bottom lines.
  • Acquisition Integration Risk: Management acknowledges that they plan for more acquisitions to boost revenues and profitability. Their history of acquisitions, however, hasn’t been great, as was seen in their write-down of goodwill, and the company must execute acquisitions successfully while preventing dilution and inefficiencies.

ACI’s business is somewhat resilient given its focus on essential payment infrastructure. However, these risks can impact the company’s ability to maintain its moat and profitability. Their main focus should be on continued innovation, and cost management, as well as diversification of the client base.

Understandability Rating:

ACI’s business model is somewhat complex, but generally easy to understand. It earns a rating of 4 out of 5 due to the following:

  • Its general business model of enabling payment transactions is not hard to understand, nor is it particularly complex.
  • The financial statements also aren’t too complicated, and the business model is not as ambiguous as other tech companies.
  • The company has many different moving parts which makes it harder to assess the future of the business, especially with a changing technological landscape.

Balance Sheet Health Rating:

ACI’s balance sheet is of decent but not great shape, and it earns a rating of 3 out of 5. Here’s why:

  • They have a high amount of debt which is partially offset by their strong free cash flow.
  • Their debt load increases significantly because of acquisition financing.
  • They do not have a large cash reserve, so, their balance sheet does not reflect very strong safety, and could be a liability if something goes wrong with their debt.
  • Their level of goodwill is also quite high ($367 million), a significant portion of their equity, and if future acquisitions turn bad, these could greatly reduce its overall assets and book value.

In 2022 ACI took a large goodwill impairment which hurt the company. They are also under investigation by regulatory bodies.

Recent News, Concerns, and Management’s Response:

The recent earnings call for Q3 2023 showed that ACI is facing significant headwinds:

  • Revenues are down compared to the same period last year, and projections for 2023 were cut down, especially with some one-off items and lower transaction volumes in specific segments.
  • Their management recognizes that they must improve their sales approach.
  • They are under investigation by authorities on compliance matters and are working to address those.

Management is trying to deal with these headwinds by streamlining costs and improving their market presence and capabilities, but the short-term impact remains uncertain. They do, however, believe in their long-term prospects, by investing in future growth areas, product development and international expansion.